According to a recent UN report, the
impact of the global economic crisis has impacted South Asian economies
indirectly by destabilizing them on employment and liquidity fronts. The capital
outflows back to the investor economies to support their own domestic liquidity
position have put immense pressure on developing economies like Pakistan.
Employment in the region has also suffered as massive job cuts have taken their
toll on the labor-intensive export industries like textiles. Pakistan's textile
sector already reeling under the pressures of energy crisis, law and order
situation and unusually high policy rate is now experiencing sagging export
demand for its products. Our export sector is largely dependent on textiles.
Government's failure to give genuine relief to this sector is going to hit our
exports to a damaging extent. The report forecasts stagnating export performance
in 2009 for South Asian economies where trade balances are likely to remain
under pressure in the wake of weaker demand in overseas markets. In our case,
workers' remittances - the only redeeming factor - are also expected to take a
downturn in consequence of the falling oil prices as most of these remittances
come from oil-rich Middle Eastern countries. This will further aggravate our
external accounts position.

Pakistan's exports during the half year
(July-December 08) have shown a mixed trend. Exports of non-textile items have
recorded a growth of 29.3 per cent to $ 4.436 billion as against $3.43 billion
during the corresponding period of the last year. On the contrary, the textile
exports declined by 1.74 per cent to $5.137 billion as against $5.228 billion
last year. The increase in non-textile exports owes much to the rice export that
went up by 109.5 per cent to $1.123 billion. We are now the fourth largest
exporter of rice after Thailand, Vietnam and United States, according to the US
Department of Agriculture data Under non-textile exports, carpet and leather
registered decline in the face of rising cost of doing business and fierce
competition from India and China.

Thanks to the depreciated rupee, the
textile exports in rupee term recorded a growth of 22 per cent. This gives the
textile industry a reason to fight for survival, although it does not lessen our
external account woes. The import of textile machinery has witnessed a drop of
37 per cent which shows that the textile sector is not interested in making
fresh investments in the industry. This sounds a bit enigmatic as a more than 30
per cent depreciation in Pak rupee should be an incentive for textile exporters.
In fact our over-dependence on textile exports has made the textile lords a bit
over-demanding. During textile boom period, they amassed huge wealth. Now when
the country is passing through a difficult economic period, they should join
hands with the government and tighten their belts to do whatever good they can,
in the given situation. The government should also reciprocate by conceding to
their just demands. The cost of business has certainly gone up, but a
depreciated rupee still remains a positive incentive.

The policy rate hike is blamed, perhaps
rightly, for hugely increasing the cost of doing business. The objective behind
the interest rate hike is generally the control over excessive liquidity and
prevention of credit diversion to the unproductive sectors. The economists stand
firmly divided over the efficacy of this policy tool to control inflation.
Keynesian view subscribes to the use of interest rate hike in mild recessionary
/ full employment situations. We are definitely not in the full employment
situation. The domestic and international events have thrown us into the lap of
recession. In essence, ours is an expanding economy and any unwarranted
interference, be it political, fiscal or monetary, is undoubtedly going to
damage it. In the world of falling interest rates, we have singled ourselves out
as an unusual economy putting our reliance on some questionable monetary policy
measures. What makes us so special as to deny the globally accepted economic
rules?

The debate on policy rate reduction or
further rise on IMF nod is on since last few months. The business and industry
are in waiting for the SBP verdict on January 31. Surprisingly, the government
has preempted by giving signals for no further increase in discount rate. The
debate usually revolves around the core inflation which has shown a marginal
decline during the last two months. According to some, the decline is not so
significant as to nudge IMF to change its stance. Policy rate change or no
change, the solution to inflation lies somewhere else. It rests with the
administrative measures that are long due ñ the measures that ensure passing of
benefits accruing from global oil and commodity prices decline to the masses and
the economy. The business and industry certainly need relief in the shape of 300
to 500 basis points phased-cuts in the policy rate during the CY 2009. Economic
growth can not be achieved and investment can not be stimulated under an
exorbitantly high interest rate regime. We have seen it in the recent past when
an interest rate matching with those of the regional economies worked wonders
and our $60 billion economy of 2000-01 expanded to a $150 billion plus economy
within a period of seven years. The uninitiated and the diehard critics of the
previous government's economic policies are still harping on the same tune.
Their own failures don't permit them to give credit to their rivals' economic
achievements for this country. They should go through an economic news article
appearing in the Dawn of January 18, 2009, titled as "IMF okayed loan on 'basis
of ex-govt's policies'". According to the article, an official source conceded:

"We reported to the IMF what ever was
factual and based on evidence."

The article concludes with the
following remarks:

"The short term liquidity facility
established by the IMF was for those countries which have a good track record of
sound policies, access to capital markets and sustainable debt burdens with a
size of loan up to 500 per cent of quota with a three-month maturity."